1907: The Banker's Panic

The turn of the twentieth century was a time of extraordinary financial innovation, much of it unregulated and poorly understood. Among other developments, the securities market saw the emergence of a vital source of investment capital: life insurance companies. The papers of Elizur Wright, held by Baker Library Historical Collections, reveal some enduring dynamics of the insurance industry’s history. Wright’s actuarial tables of the 1850s, the first based on American mortality data, represented a step forward in risk-management mechanisms, and his efforts to reform the industry anticipated later debates over a firm’s responsibilities to small and vulnerable policyholders.

By 1900, there was $20 billion of life insurance in force in the United States. Consequently, the executives responsible for investing these funds became major players on the stock market. In 1905, a lavish costume ball thrown by James Hyde, vice president of the Equitable Life Assurance Society, provoked rumors that he and other executives were profiting at policyholders’ expense. The ensuing scandal revealed that the Equitable’s executives regularly blurred the line between personal and company investments. A Price, Waterhouse audit in 1906 concluded that “Officers and Directors of the Society have been interested in Syndicates in which the Society has participated or from which it has purchased securities,” and that some of these managers made profits that were not repaid to the firm.10

The contrast between the advertised aims of life insurance—provision for widows and orphans—and the high-living directors who speculated with their policyholders’ hard-earned money became a popular target for muckraking journalists and populist politicians, culminating in governmental investigation and prohibition of popular forms of life insurance. According to contemporaries, the investigation and reform of the life insurance industry in 1905–1906 had chilling effects on the stock market, eventually contributing to the Panic of 1907.11

Another financial innovation of the period was the trust company. Trusts performed many of the same functions as traditional banks, but enjoyed greater freedom and were thus able to offer higher rates of return.12 When the stock market tumbled in October 1907 and set off a series of bank runs, many overextended trust companies found themselves in serious trouble. The failure of New York’s Knickerbocker Trust and the suicide of its president, Charles T. Barney, became the best-known tragedies of the crisis.13